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Cost-benefit analysis and the politics of valuing the environment

Anna Davies and David Demeritt

'What matters "... is what goes without saying, which is determined by tradition; and tradition is always silent", not least about itself.' (Eagleton, 1991: 157)

Introduction

The greening of the Thatcher government through her keynote speech in 1989 and the government commissioned Blueprint for a Green Economy written by UCL economist David Pearce et al. (1989) stimulated the emergence of environmental economics as a powerful policy discourse, particularly through Cost Benefit Analysis (CBA) and associated techniques of cost-effectiveness analysis, multi-criteria analysis, and contingent valuation (CV). With roots firmly in the utilitarian tradition of neo-classical economics, they present politicians with an economically manageable version of environmentalism. No longer are environment and economy seen to be at odds. Instead, environmental economics imagines them as being potentially complementary through ecological modernisation, a harmonious vision of technologically driven and mutually reinforcing economic and environmental progress that was recognizably 'Third Way' (and just as antithetical to social conflict) before Tony and 'the boys' even coined the phrase (Weale, 1992; Hajer, 1995). According to environmental economists, environmental problems are the result of market failures, often caused by government subsidies to uncompetitive industries, like the British coal industry, or a lack of clear private property rights, so that the 'true' costs of environmental pollution and protection are not fully reflected by the market where competition among individual profit-maximizing decision-makers would ensure that they were supplied at optimal, which is to say the most economically cost-efficient, levels. Given its political commitments to deregulation and privatisation, the Thatcher governments were understandably attracted to environmental economics, its vision of ecological modernisation, and its economic theory of environmental problems. Through CBA and associated techniques, environmental economics promised a technical means of delivering environmental protection that was consistent both with economic expansion and with a prevailing bureaucratic culture of administrative rationality.

Their star continues to shine brightly, notwithstanding the change of government. Indeed, environmental economics and CBA are, arguably, even more firmly entrenched under the Blair administration than ever before. While the Department of Environment Transport and the Regions (DETR) has begun to make noises about greater participation, partnership and devolution in governance practices, the Blair administration has also warmly embraced the practice of CBA in its audit culture enthusiasm for so-called 'best value' government. It is unclear how the government will reconcile the idea of partnership and participation, which allow for heterogeneous and regionally differentiated policy outcomes, with its overarching ambition to 'modernise' Britain, which implies technical standardization and centralized monitoring by Whitehall in the interests of more cost efficient and modern governance. Despite the government's promise to base its policy-making upon multiple social and environmental indicators, preliminary indications would suggest that when push comes to shove the economic calculations of the Treasury still carry the day over other considerations.

Partly in response, other government ministries, planning bodies, and agencies have adopted this hegemonic economic language of CBA to frame their environmental policy proposals. For instance, even a superficial glance at policy documentation emanating from the DETR reveals the extent to which CBA permeates administrative decision-making within the department. Over a thousand references are returned when searching for examples of the technique in DETR's literature. The department is applying CBA to policy in areas as diverse as open space provision, regeneration policies, road transport and air quality. By translating heterogeneous environmental goods and bads into the standardizing calculus of monetary costs and benefits, officials in the DETR are seeking to advance their programmes in the only language that seems to count with the government these days: money.

The Environment Agency seems no less fixated on CBA as a technique of modernised environmental policy-making. To take just one recent example, its approval of an £8.9 million flood alleviation scheme on the Quaggy River in Lewisham was dependent on an extensive (and expensive) CBA. Although the minutes of the 20 October 1999 meeting of the Agency board refer in passing to the results of a series of public consultations, its final decision appears to rest entirely on the results of an economic CBA (Environment Agency, 1999).

The attractions of this approach to environmental policy making are several. In keeping with the 'Third Way' predilections of the government for having its cake and eating it too, environmental economics provides a powerful economic theory in which to define such potentially controversial policy objectives as sustainability and optimal levels of pollution as well as the market based economic instruments, such as green taxes and tradeable pollution permits, to achieve them. Moreover, the specific technique of CBA offers an invaluable tool for governance: an apparently rational and politically objective framework in which to assess trade-offs between different policy options. Given both the contentiousness of environmental policy-making, as evidenced, for example, by the anti-road protests, and the lack of public legitimacy enjoyed by QUANGOs like the Environment Agency, the need for such an apparently neutral framework is acutely felt. Since any environmental policy 'will imply a value for environmental resources in terms either of the other benefits foregone to preserve the environment or of the other benefits gained at the expense of the environment', monetary valuation of the trade-offs, explains the Department of Environment's (1991, para. 4.15) Policy Appraisal and the Environment, provides 'a convenient means of expressing the relative values which society places on different uses of resources'.

It is a testament to the hegemony of economics that the normative judgements that such monetary valuation involves have become normalised into unquestionable 'common-sense'. If the DETR's latest guidelines on Policy Appraisal and the Environment (1999, para. 6.8) are somewhat less strident about insisting upon the performance of a formal CBA for any policy decision, they are no less insistent that best practice involves environmental impacts being 'quantif[ied] where possible'. Any concession about the absolute necessity of reducing heterogeneous environmental impacts to the common and therefore comparable metric of their 'monetary value' is driven more by concerns about the cost effectiveness of 'devot[ing] resources to appraising insignificant environmental aspects' than by any misgivings about the technique or its ability adequately to represent the diversity of social concerns about the environment. Indeed, the DETR (1999 para 6.9) largely dismisses criticisms about the partiality of monetary valuation as a technical problem about the 'robustness and transferability' existing estimates.

In addition to our alarm about how this economic calculus of profit and loss has come to be the only politically effective basis on which to appeal for environmental protection in the UK, we are concerned that in the rush to embrace CBA as a tool of ecologically modernised and economically efficient environmental policy making that insufficient attention has been paid to the specific ethical judgements and social inequalities that it entails. The practice of CBA involves a number of highly debatable assumptions and value laden judgements. The legitimacy and credibility of these analytical practices is negotiated by relatively small communities of experts. The danger is that policy-makers and others committed to using the cost numbers may not fully appreciate, let alone endorse, all of the interpretive judgments and informal understandings built into them. Accordingly, in this short commentary we want to highlight some questions about the underlying ethical foundations and political implications of using CBA and monetary valuation as a basis for environmental policy-making.

Environmental values and the values of economics

Although presented as an objective and politically neutral framework for assessing environmental policies and making political decisions about them, CBA involves a number of contentious and value-laden assumptions about the nature of the human subject, the cause of environmental problems, the value of the environment, and the politics of its protection. In particular, we want to focus on the politics of valuing the environment in monetary terms. CBA analysis depends on three highly contested conceits:

1. monetary valuation provides both a neutral and a universal measure of the social value of heterogeneous social goods and bads;
2. the practical difficulties of assigning monetary values to unpriced goods and bads are technical, and not political or value-laden;
3. the objective process of measuring these effects monetarily informs but is absolutely independent of the political process of deciding what to do about them.

Economic value = social welfare = society's values?

Environmental economists present market price as a 'measure [of] human preferences for or against changes in the state of environments' (Pearce, 1992: 7). For those environmental goods and bads that are not bought and sold, environmental economists have devised various surrogate measures (see below) to estimate individuals' willingness to pay for them. Such a monetary valuation represents a particular, and somewhat narrow, representation of social value. A common example used to describe this difference is the diamond-water paradox - the price of diamonds is much greater than that of water, but no one has been known to die from a lack of diamonds, whereas it is impossible to live for more than a few days without water. It is a fundamental axiom of neo-classical economics and its methodological individualism that the social good is nothing more than the aggregation of these individual preferences as expressed through the market, and thus that the optimal decision to make is one that produces the lowest aggregate ratio of costs to benefits, regardless of its distributional implications.

Even on its own terms, these assumptions are highly problematic. As environmental economists themselves recognize, existing markets are rarely free from distortion. Nor do they consider many environmental externalities. Economic theory specifies other, fairly stringent requirements for the market price to be taken as an accurate measure of the full economic value of some outcome. These include the assumption of rational agents perfectly knowledgeable about the consequences of their actions and able, therefore, to act consistently in a way that maximizes their individual utility. Critics complain that human behavior hardly ever lives up to this assumption of economic rationality. For the most part, however, economists have dismissed these criticisms as simply technical difficulties and proposed a variety of exhaustive procedures to overcome cognitive difficulties with uncertainty, incomplete knowledge, and the inability to evaluate the various costs and benefits associated with complex environmental trade-offs.

More importantly, the economists' framework for measuring individual preferences about the environment is unable to deal with claims based on assertions of right or moral absolutes. Mark Sagoff (1988: 94) argues that CBA makes a logical category mistake in confusing values with preferences. Environmental policy decisions, he writes, involve:

not desires or wants but opinions or views. They state what a person believes is right or best for the community or group as a whole. These opinions may be true or false, and we may meaningfully ask that person for the reasons that he or she holds them. But an analyst who asks how much citizens would pay to satisfy opinions that they advocate through political association commits a category mistake. The analyst asks of beliefs about objective facts a question that is appropriate only to subjective interests.

Income bias

Another objection to CBA and its use of monetary values to represent the social value of environmental goods and bads is that this system has an inherent bias against poorer persons and persons in poorer regions. The price of market goods is a function of effective demand and willingness to pay. These, in turn, are constrained by the ability to pay, i.e. wealth or income. Monetary valuation in effect yields the result that the cost of any environmental bad is less if it is poor people, or people in poorer countries, who suffer (1996, p.98-99). The practical consequences of this cold-blooded economic logic were clearly demonstrated by the memo written by former World Bank economist and now US Treasury Secretary Lawrence Summers and leaked to the Economist (quoted in Harvey, 1996: 366-67):

Just between you and me, shouldn't the World Bank be encouraging more migration of dirty industries to the Less Developed Countries (LDCs). I can think of three reasons:

1. The measurement of the costs of health-impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2. The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low costs. I've always thought that under-populated countries in Africa are vastly under-polluted; their air pollution is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradeable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare-enhancing trade in air pollution and waste.
3. The demand for a clean environment for aesthetic and health reasons is likely to have a very high income elasticity. The concern over an agent that causes one in a million change in the odds of prostate cancer is obviously going to be much higher in a country where people survive to get prostate cancer than in a country where under-5 mortality is 200 per thousand... Clearly trade in goods that embody aesthetic pollution concerns would be welfare enhancing.

What is true internationally, is also nationally, and so here in Britain one of the best predictors for the location of environmental hazards is likely to be the geographical concentrations of poor people.

Substitutability

Monetary valuation demands the reduction of the very different physical qualities of the environmental to a single quantitative metric. In addition to the questions we raise above about the adequacy and equity of CBA, its use of monetary valuation makes the very problematic assumption about the moral and practical interchangeability of the very different entities and outcomes being assessed. If a dollar value can be placed on both a barrel of oil and a human life, does this mean that a sufficiently large number of barrels of oil can substitute for a human life? Can the extinction of a species be compensated for by placing the assets earned from their extinction in a bank and accruing interest on these assets?

Assumptions about substitutability have a strong moral dimension and underlie much of the debates about sustainable development. Does 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs' imply that future generations should inherit a world with as much of every resource as the present one? (World Commission on Environment and Development, 1987). Or does it allow for greater quantities of one good to offset the irreversible loss of another? Most environmental economists advocate what might be called weak sustainability which allows for the depletion of natural resources to be offset by future increases in human-produced capital or by the substitution of other goods. Since advocates of weak sustainability presume the possibility for infinite substitution among goods, they are less concerned about the possibility of irreversible impacts and extinction, because they believe that future generations can be adequately compensated for any declines in the stocks of a natural resource by increases in the stock of other kinds of capital.

By contrast, proponents of strong sustainability insist that some environmental and social goods and services are irreplaceable and thus must be preserved whatever the cost. Such a view imposes severe limits on the potential for trade-offs and thus on the use of CBA as a framework for deciding among them. This injunction against inflicting certain kind of environmental (or other) damage stems both from a moral conviction that the obligation to avoid harm is absolute and from a scientific belief that there are no adequate substitutes for many irreversible environmental impacts. With its assumptions about the moral and practical substitutability of natural and human capital, environmental economics and CBA are deeply antithetical to both of these widely held beliefs.

Discounting

To compare costs and benefits occurring at different times, CBA uses a discount rate to compare them to their present value. This practice depends upon a very particular and by no means universally acceptable attitude to time and to human subjectivity. It assumes, first, that people are impatient and would rather receive a dollar today than tomorrow; second, that an extra dollar is worth less to a richer person than a poorer person, the so-called declining marginal utility of income; and third, that we will all be richer in the future. Given these assumptions, environmental economists apply a discount rate, which is dependent on assumptions about future interest rates, to the economic value of future costs and benefits in order to aggregate them across time. This is based on the idea of a single long-lived agent able to make rational trade-offs between present and future benefits. While perhaps appropriate for short time horizons and project level CBA, this assumption becomes much more problematic over the long time horizons involved in many environmental policy debates. As with the assumption of substitutability, the practice of discounting involves fundamental issues of inter-generation equity. The mitigation of climate change, extinction of species, and destruction of natural habitat involve intergenerational allocations of costs and benefits.

The debate about discounting is important because calculations of the costs and benefits of these environmental impacts (and thus the policy recommendation that flow from them) are extremely sensitive to the choice of discount rate. Consider the example of climate change. Using a 7% discount rate, as is commonly used in short-horizon project analysis, damages of £1 billion 50 years hence have a present value of only £33.9 million; the same damages 200 years hence are a present value of only £1300. Discounting makes it extremely difficult to justify, on economic grounds at least, any immediate action to deal with global climate change.

Conclusion

True to its origins in neo-classical economics, CBA depends upon a theory of human agency and social change. Since people are supposed to be instrumentally calculating, individualistic, and motivated only by profit as opposed to wider social and aesthetic concerns with justice or beauty, the best and most efficient way to achieve environmental improvements is by inducing individual behavioral change through green taxes and other economic instruments that will force individuals to recalculate the economic costs and benefits of pollution and motivate them to act in an environmentally sustainable fashion.

We fear that environmental policies designed on this basis are doomed to failure. They will fail for two distinct, but related reasons. First, the environmentally instrumental model of human subjectivity on which they are based is seriously deficient. Individual choice is influenced by habit, economic and social structures, mistrust of authority, and feelings of powerlessness. CBA and environmental economics more generally distract us from the wider social contexts and deeper economic structures in which environmental problems are produced and understood. Until these can be addressed more effectively, the best that can be hoped for is to ameliorate the symptoms, but not the underlying causes of environmental problems.

Second, there are reasons to fear that even attempts to treat these symptoms through policies founded on CBA and environmental economics will fail for the reasons that many people find their assumptions offensive. Witness the uproar over rail safety in the wake of the Paddington disaster. Railtrack and the government have been publicly lambasted for not implementing the Automatic Train Protection system on the economically rational grounds that in terms of projected cost per life saved, more lives would be saved by spending scarce resources to improve safety elsewhere in the rail system. While perhaps economically rational, such a decision ignores other important public feelings about trust and corporate responsibility.

CBA is not as yet 'out and proud' in the public realm, but it is deeply entrenched within the machinery of government and, in particular, the DETR. Its highly technical practices obscure the pervasive politicisation that it involves. CBA universalizes a particular economic rationality at the expense of the political and ethical considerations in which it is embedded. When these value laden and political judgements are exposed, as they were in the case of the Summers memo or in the wake of the Paddington rail disaster, there is the danger that they will reinforce patterns of mistrust and alienation from decision-making rather than reverse the culture of non-participation clear in the UK at present. This misreading has important implications for how environmental economists go about valuing non-market environmental goods.

REFERENCES

Department of Environment (1991), Policy Appraisal and the Environment: A Guide for Government Departments, London: HMSO.

DETR (1999), Policy Appraisal and the Environment, (http://www.environment.detr.gov.uk/appraisal.index.html).

Eagleton, T. (1991), Ideology: An Introduction, London: Verso.

Environment Agency (1999, 20 October), Board Paper: Item 12 - Scheme of Delegation report - EA (99) 51 (http://www.environment-agency.gov.uk//modules/MOD56.39.html).

Hajer, M. (1995), The Politics of Environmental Discourse: Ecological Modernization and the Policy Process, Oxford: Oxford University Press.

Harvey, D. (1996), Justice, Nature, and the Geography of Difference, Oxford: Blackwell.

Pearce, D. A. Markandya, E. Barbier (1989), Blueprint for a Green Economy, London: Earthscan.

Sagoff, M. (1988), Economy of the Earth, Cambridge: Cambridge University Press.

Weale, A. (1992), The New Politics of Pollution, Manchester: Manchester University Press.

World Commission on Environment and Development (1987), Our Common Future, New York: Oxford University Press

Anna Davies and David Demeritt
Department of Geography
King's College London
Strand
London WC2R 2LS
Tel: 020 7848 2612

E-mail: anna.ray.davies@kcl.ac.uk; ... david.demeritt@kcl.ac.uk